Interest on Delayed Payment

Interest on delayed payment is the financial compensation that a contractor or supplier can claim when a government procuring entity fails to release certified bills within the payment timeline specified in the contract or mandated by statute.

What is Interest on Delayed Payment?

Government contracts in India specify payment timelines, most commonly 30 days from the date of bill certification under GFR 2017. When certified payments are not made within this period, the contractor is entitled to claim interest on the overdue amount. Two legal frameworks apply:

1. Contractual interest clause: Most standard government contracts (CPWD, PWD, PSU) include a clause specifying that interest will be paid at a defined rate, typically State Bank of India's Marginal Cost of Funds based Lending Rate (MCLR) plus 2 to 4 percent, for delays beyond the due date. The contractor must formally claim this interest, usually in the final bill.

2. MSMED Act 2006 (statutory): For registered MSME vendors, Section 16 of the Micro, Small and Medium Enterprises Development Act provides a statutory right to interest at three times the bank rate notified by RBI, compounded monthly, if payment is not made within 45 days of the date of supply or the agreed date, whichever is earlier. This right exists regardless of what the contract says.

Non-MSME contractors must rely on the contractual clause. If the contract is silent on interest, courts have awarded interest at the market rate in arbitration proceedings.

Key points for claiming delayed payment interest:

• Keep records of the date of bill submission and the date of certification.
• Send a formal notice to the procuring entity specifying the overdue amount and interest calculation.
• MSME vendors can approach the MSME Facilitation Council for resolution.
• Non-MSME contractors typically pursue this through the contract's dispute resolution clause or arbitration.

Why Interest on Delayed Payment matters for Indian government suppliers

In many state departments, actual payment timelines range from 60 to 180 days against a 30-day contractual obligation. For a contractor with INR 1 crore outstanding at 12 percent per annum, a 90-day delay costs approximately INR 3 lakh in financing costs. Systematically claiming interest on delayed payment recovers a material portion of this cost and also creates a record that supports commercial or arbitration claims later. MSMEs should register under the UDYAM portal to access the stronger statutory protections under the MSMED Act.

Example

An MSME vendor supplies and installs electrical equipment worth INR 25 lakh to a state PSU. The goods are accepted on 1 April. Payment falls due within 45 days (by 15 May) under the MSMED Act. The PSU pays on 15 August, 91 days late. Interest at three times the RBI bank rate (assume 6 percent bank rate, so 18 percent per annum) on INR 25 lakh for 91 days = approximately INR 1.12 lakh. The vendor files a claim before the MSME Facilitation Council.

Frequently Asked Questions

Can a contractor waive the right to interest on delayed payment?

Non-MSME contractors can waive contractual interest. However, MSME vendors cannot contractually waive their right to interest under the MSMED Act 2006, any such waiver is void as per the Act.

Where does an MSME vendor file a delayed payment claim?

An MSME vendor should file a reference with the MSME Facilitation Council constituted by the state government or MSME Development Institutes. The Council first conciliates and, if that fails, arbitrates the dispute. Decisions are enforceable as decrees.

Is interest on delayed payment taxable?

Yes. Interest on delayed payment received from a government entity is taxable as income in the hands of the contractor under the Income Tax Act. TDS may also apply on the interest payment.

Does delayed payment interest apply to GeM orders?

Yes. GeM orders to MSME sellers attract MSMED Act protections. GeM's payment system aims for 10-day payment, but where delays occur, the same statutory interest provisions apply as for direct procurement.